Question

a. Define the law of demand and draw a Demand Curve labeling all the axes correctly.

b. List the "Ceteris Paribus" variables that affect demand and illustrate a shift in a Demand Curve.

Answer 1

a) Law of demand says that as price decrease from P to P1 , ceteris parbius, quantity demanded of a good rises from Y to Y1 which shows a downward movement along the demand curve from point A to B and vice versa.

b) Variable that shift demand curve are:

• Income of consumer: If there is rise in income of consumer, they will purchase more of the goods and raise demand. It will shift demand curve to its right.
• Price of Substitute or Complement good: If price of substitute good rises, consumer will raise demand of the particular product which  will shift demand curve to its right.while if price of complement good rises, consumer will reduce demand of particular product which will shift demand curve to its left.
• Trend in market: If there is trend of a specific product in market which most of the consumer is adopting, demand of that good will rise which will shift demand curve to its right.
• Future expectations: If the good will not be available in the future or there will be shortage of goods, consumer will consume these goods now which raise its aggregate demand. It will shift demand curve to its right.
• Customer Base: If there is rise in population or consumers, there will be rise in demand of all goods. It will shift demand curve to its right.